Holding

Rentals for cylinders and notional interest on deposits are ancillary to the supply of gases and therefore are excluded from the assessable value under Section 4(1)(a) of the Central Excise & Salt Act, 1944.

Summary

Indian Oxygen Ltd., a manufacturer of dissolved acetylene and compressed oxygen gases, supplied the gases in cylinders. Some customers used their own cylinders while others used cylinders supplied by the company, for which the company charged a rental fee and took a deposit on which a notional 18% interest was calculated. The Central Excise authorities held that these rentals and interest were part of the assessable value under Section 4(1)(a) of the Central Excise & Salt Act, 1944, and ordered duty. The Central Excise and Gold Control Appellate Tribunal reversed, holding the charges were not related to the cost of manufacture. On appeal, the Supreme Court affirmed the Tribunal, holding that rentals and notional interest are ancillary services, not part of the manufacture of gases, and the proviso for different classes of buyers does not apply. Consequently, the appeals were dismissed.

Issues considered

Whether rental charges for gas cylinders and notional interest on deposits are includable in the assessable value under Section 4(1)(a) of the Central Excise & Salt Act, 1944.
Whether the proviso to Section 4(1)(a) permitting different prices for different classes of buyers applies to the rental and interest charges.
Whether such charges are related to the cost of manufacture of the excisable goods.

Legislation cited

Central Excise & Salt Act, 1944s. 11A, s. 35L(b), s. 4(1)(a), s. Rule 8

Subjects

central exciseassessable valueancillary servicesrental chargesnotional interestcylindersgas manufacturingSection 4provisodifferent classes of buyers

Judgment

COLLECTOR OF CENTRAL EXCISJ;:, MADRAS
v.
INDIAN OXYOEN LTD.

AUGUST 2, 1988

[SAB:YASACHI MUKHARJI AND L.M. SHARMA, JJ.) B

Central Excises And Salt Act, 1944: Section 4( 1)(a) and 35L(b )-
Manufacturer of dissolved acetylene gas and compressed oxygen gas=
For purposes of supply-Rental Charged for cylinders-Interest paitf
on· deposits taken from customers-Charges pn account of rent.a! af!if
interest on deposits-Whether relatable to ~ost of'manufacture'.
c
The respondent firm are manufacturers of dissolv!'d acetylene gas
and compressed oxygen gas. They were supplying these gase~ iy
cylinders at their factory gate. For t.aklng delivery some consumers/
customers used to bring their own cylinders and take the delivery.
Others, used to have the delivery in the cylinders supplied by the D
· respondent firm. For the purpose of such supply of cylinders certain
rentals were charged by the firm, and also to ensure that these cylinders
are returned, a certain amount as deposit used to be taken from the
customers. On these deposits notional interest at 18 percent per annum
w.as calculated.
E
The Central Excise Authorities issued show-cause notices to the
·respondent on the ground that the -notional income on the deposit of
cylinders .an!! the rental are part of the assessable-".a.lue, and he.nee
should he included in comp\lting the assessable value.. fo their ,repJy :the
respondent stated that the deposits from the buyers ,were ,only to .ens\l,re
return of the gas cylinders from the customers. F

The Assistant Collector by his order dated 3rd June, !1965 held
that the respondent had to pay excise duty on the inte•est ear1,1ed at l8%
during the -relevant period, and :that as the respondent had suppressed
this fact from the rev.enue during the past 5 years, the amount was
·indudible .and .recoverable ·under Rule 8 read with Section 1IA of -the G
l:entrai Excises and Salt Ac.I. He also included the rentals of the
.cylinders in the value.

In .appeaHhe :(;ollec.tor Jlp_held t.he •or!li>r ,of1t\l.e Assista_nt <Ct,11lec.t11.r
.but,with-certai1,1·mo.cli.t'ications .

...
\
762 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.

The respondent appealed to the Central Excise and Gold Control
A
Appellate Tribunal, which allowed the appeal, and held that the charge
on account of rentals for the cylinders and the interest which accrued on
the deposit for the cylinder are not relatable to the cost of manufacture
of the goods, and therefore under Section 4 deleted from the value,
rentals for the cylinders and the interest on the deposit.
B
In the appeals to this Court it was contended on behalf of the
Revenue that there are two different classes of buyers, one class who
brings their own cylinders, and the others who get their supply through
the cylinders of the suppliers, and that different rates for these two
classes of buyers constitute two different markets and are contemplated
and permissible, under the first proviso to Section 4(l)(a) of the Act.
c
Dismissing the Appeals,

HELD: I. Section 4(l)(a) proviso can be of no avail to the
Revenue. There may be different classes of buyers for different classes
D of goods. In the instant case, if the respondent company sold the gases
to different classes of buyers then different prices may be charged. If
the gases had been sold to different classes of buyers at different rates, it
is possible that there might be different markets for the same. The
charges like rental for the cylinders and the notional interest income are
for ancillary or allied services and that is not an activity of manu-
E facture. [766A-BJ

Union of India & Ors. v. Bombay Tyre International Ltd., [1984)
I SCR 347 and Asstt. Collector of Central Excise v. Madras Rubber
Factory Ltd., [1986) Supp SCC 751, referred to.

F 2. It is well settled that levy under the Central Excises Salt Act is on '
manufacture. In the instant case, the sale is of gases. The levy is on the
manufacture of gases and the excisable goods are these gases. [764G, H]

3. Gas being a commodity of peculiar nature, has to be delivered
by cylinders, but these cylinders might be supplied either by the sup-
G plier as an ancillary activity or brought by the consumers or purchasers
at their own risk and cost. For purchasers taking it in their own
cylinders supplied hy them, there was no charge for them. This is not an
activity for the manufacture of gases. This is ancillary to it but not
incidental. [76SC] ~·

H In the instant case. there are two different supplies. One is supply

'•
COLLECTOR OF C.E. v. INDIAN OXYGEN [MUKHARJI, J.] 763

of gases and the other is an incidental supply of cylinders on rent. The A
interest notional or real accruing on deposits for the safe return or
cylinders as well as the rental would not constitute part of the assess·
able-value. The Tribunal was right in the view it took. [766C-D)

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
2349-61 of 1988. B

" From the Order dated 8.7.1987 of the Customs Excise and Gold
Control Appellate Tribunal, New Delhi in Appeal Nos. E/1583 to 1589/
86-A and 1533, 1521, 1528, 1529-31/1986-A and Order No. 491 to 503
of 1987.

A.K. Ganguli, Mrs. Indu l\lalhotra and Mrs. Sushma Suri for the c
Appellant.

Soli J. Sorabji, M. Chandrasekharan Mrs. V .J. Francis anjl N .M.
Popli for the Respondent.
D
The Judgment of the Court was delivered by

SABY ASA CHI MUKHARJI, J. These appeals are under Section
35L(b) of the Central Excises & Salt Act, 1944 (hereinafter called 'the
Act') directed. against the decision of the Custori)s Excise (Gold)
Control Appellate Tribunal, New Delhi, (hereinafter called 'the E
CEGAT').

The respondent M/s. Indian Oxygen Ltd., Visakhapatnam, are
manufacturers of dissolved acetylene gas and compressed oxygen gas
,. (hereinafter called 'the gases'). The respondent was supplying these
gases in cylinders at their factory gate. For taking delivery of these F
gases, some consumers/customers used to bring their own cylinders
and take the delivery, while others used to have the delivery in the
cylinders supplied by the respondent. For the purpose of such supply
of cylinders, certain rentals were charged by the respondent and .also to
ensure that these cylinders are returned properly, certain amount of
deposit used to be taken from the customers. On those deposits G
notional interest @ 18% per annum was calcuiated. These two
amounts with which we are concerned, namely, the rentals of the
cylinders and the notional interest earned on the deposit of cylinders,
are the subject-matters of the dispute herein. Whether these two
amounts were includible in the value under Section 4 of the Act, is the
question. The revenue's case is that the notional income on deposit of H
•

764 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.

f'i. cylinders and the rental are part of the asessable-value and, hence,
should be included in computing the assessable-value. The respon-
dent, however, disputed that. They had neither included such rentals
nor the interest received from the buyers in the price list for the assess-
ment. Therefore, the revenue issued show-cause notices to the respon-
B dent. In their reply the respondent stated that the deposits from buyers
were only to ensure return of the gas clinders from the customers.
)
The Asstt. Collector Central Excise, Visakhapatnam, by an
order dated 3.6.1965 held that the respondent had to pay excise-duty
on the interest earned @ 18% during the relevant period. He further
held that since the respondent had suppressed this fact from the
c revenue, in the past 5 years, under Rule 8 read with Section llA of the
Act, these are includible. He also included the rentals of these•
cylinders in the value. On an appeal, the Collector of Central Excise,
Madras, upheld the said order with certain modifications.

D Dissatisfied with the aforesaid, the respondents appealed to the
CEGAT. In its order under appeal, the Tribunal observed, inter alia,
as follows:

"As regards charge on account of rental for the cylinders
and the interest which accrues on account of deposit re-
E ceipts for the supply of gases in returnable cylinders, we are
not persuaded that either of these charges is related to the
cost of manufacture of the goods as such."

The Tribunal, therefore, under Section 4 deleted from the value,
rentals for the cylinders and interest which accrued on account of
F deposit receipts for the supply of gases. Hence, this appeal by the ,.
Collector.

It is well-settled that the levy under the Act, is on the manu-
facture. Under Section 4(l)(a) of the Act, excise-duty is chargeable on
any excisable goods with reference to value, such value shall, subject
G to the other provisions of this Section, be deemed to be the normal
price thereof, that is to say, the price at which such goods are ordi-
narily sold by the assessee to a buyer in the course of wholesale trade
for delivery at the time and place of removal, where the buyer is not a
related person and the price is the sole consideration for the sale. Here
the sale is of the gases. The levy is on the manufacture of gases and the
H excisable goods are these gases.
COLLECTOR OF C.E. v. INDIAN OXYGEN [MUKHAR.!i, i.J 765

The scope of Section 4 has been explained by this Court in Union
A
of India & Ors. v. Bombay Tyre International Ltd., [1984] 1 SCR 347
as well as the ramifications thereof in Asstt. Collector of Central Excise
v. Madras Rubber Factory Ltd., [1986] Supp sec 751. in the light of
the aforesaid principles it has to be borne in mind that the supply of
gas cylinders is ancillary to the supply of gases but it is strictly not
incidental thereto because there are classes of persons who can take
delivery of these gases without supply of cylinders by the respondent
and in those cases no question of charging rental nor interest on those
deposits for cylinders, would arise. It is true that the gas being a
commodity of peculiar nature, had to be delivered in cylinders but
"these cylinders might be supplied either by the supplier as an ancillary
activity or brought by the consumer or 1'urchasers at their own risk and
cost. For purchasers taking it in their own cylinders supplied by them,
c
there was ng charge for them. This is not an activity for the manu-
facture of'gases. This is ancillary to it but not incidental. Any income
either in the shape of interest on deposits, )lotional or real, may be
earned on the deposit for the safe return <if cylinders, or any. rental
would be though ancillary. but would not be the price for the manu- D
facture. These might be profits or gains, if any, of any ancillary or
allied venture. If that is the true position, then on the principle under
Section 4(!)(a) of the Act, the Tribunal was right in excluding these
two amounts while computing the value of the excisable goods.

Mr. A.K. Ganguli, learned counsel appearing for the revenue, E
sought to urge before us that there are two different classes of buyers,
one class of such buyers was who used to bring their own cylinders and
the others used to get their supplies through the cylinders of the sup-
pliers. According to him, different rates for these two classes of
buyers, in fact, constitute two different markets and are permissible.
This, according to him, is contemplated under the f1F(;t ,proviso to F
Section 4(1)(a) of the Act, which reads as follows:

H(i) where, in accordance with the normal practice of the
wholesale trade in such goods, such goods are-sold bv the
assessee at different prices to different classes of buyers
(not being related persons) each such price shall, subject to ·G .
the existence of the other circumstances specified in clause
(a), be deemed· to be the normal price of ·such goods in
relation to each such class of buyers."

There may be different classes of buyers for dilfereilt classes of
goods. Section 4(1)(a) of the Act emphasises that if the good• is"of'tlie H
766 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.

A same type, the prices should also be the same. The proviso to the said
Section postulates that where in accordance with nonnal practice such
goods, namely, the gases are sold to different classes of buyers then
different prices may be charged. If gases had been sold to different
classes of buyers at different rates, it is possible that there might be
different markets for the same. But here the charges like rentals for
B
ihe cylinders and the notional interest income, are for ancillary or
allied services and that is not an activity of manufacture. Hence, Sec-
tion 4(1)(a) proviso can be of no avail to the renenue.

It is a case of two different supplies. One is supply of gases and
the other is incidental supply of cylinders for rent. In that view of the
c matter, in our opinion, the Tribunal was right in the view it took. The
interest, notional or real, accruing on deposits for the safe return of
cylinders as well as the rentals would not constitute part of the
assessable-value.

In the aforesaid view of the matter the order di the Tribunal
0 needs no interference. The appeals, accordingly, fail and are dismis-
sed. There will be no order as to costs.

N.V.K. Appeals dismissed.

)